Nomura Holdings, Inc. (8604) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Nomura Holdings First Quarter operating results for fiscal year ended March 2027 conference call. Please be reminded that today's conference call is being recorded at the request of the hosting company. [Operator Instructions]. Please note that this telephone conference contains certain forward-looking statements and other projected results, which involve known and unknown risks, delays, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor enhancements, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions. With that, we'd like to begin the conference. Mr. Hiroyuki Moriuchi, Chief Financial Officer. Please go ahead.

This is Moriuchi, CFO speaking. I would like to start right away to report the results from Q1 year ending March 2027. All divisions achieved revenue and income before income taxes than in the previous quarter and ROE reached 15.4%. We believe the result of the structural reforms implemented over the past few years are now suddenly being reflected in our performance and that we are making good progress for our 2030 management vision. I would like to highlight 3 key points. First, growth in our recurring revenue business contributed to the steady strengthening of our stable revenue base. Second, our international businesses for sharp growth, particularly in our priority areas before income taxes in our 3 overseas regions reached a record high since this closure began in fiscal year 2009 adding greater debt profits. Third, we launched deposit sweep service to strengthen our banking business, and we are still laying the groundwork for future growth. Through these initiatives, we feel confident that heading towards 2030, the stability of our earnings base has improved and our ability to generate profit has also been enhanced. We now look at first quarter results for each division. Please turn to Page 7. All percentage discussed from now on are based on quarter-on-quarter comparison. On the top left, you can see the Wealth Management net revenue increased 9% to JPY 145.4 billion, while income before income taxes increased to JPY 71.1 billion. Thus, revenue and income increased for the fiscal consecutive quarters as asset management business transformed the division's revenue structure. On the bottom left, you can see the recurring revenue rose to an all-time high of JPY 59.2 billion. Net inflows of recurring revenue assets also remained strong, reaching an all-time high of JPY 59.6 billion. Flow revenue was strong too. After the perceptions of client activity as major equity markets hit all-time highs ensured growth in high-quality flow that in turn translated into growth in recurring revenue assets and thereby supported revenue growth. solid cost controls also enabled the division to generate a high ratio of pretax profit margin of 49%. And -- the recurring revenue cost coverage ratio came in at 76%, representing steady progress toward the target in our 2030 vision. Please turn to Page 8, where you can see an update on total sales by product. total sales fell versus the previous quarter to JPY 8.5 trillion, but sales predicated on long-term diversified investment roads, thereby ensuring high-quality inflows that will translate into recurring revenue. By product, stocks registered a decline of 36% owing to the absence of major tender offers, but remain high in absolute terms. Bonds registered right of 14% as rising yen interest rates ensured solid demand for Japanese bonds. Investment trusts and discussion investments, which constitute recurring revenue assets registered substantial growth of 22% and 30%, respectively, supported by services tailored to client requirements and the solid product lineup that only Nomura can offer insurance also registered substantial growth of 36% on strong demand for pension and estate planning. Next, I would like to look at KPIs on Page 9. On the top left, you can see the recurring revenue assets saw a net inflow of JPY 39.6 billion, which represents the 17 consecutive quarters of net inflows. As a result, as shown on the top right, recurring revenue assets totaled JPY 31.7 trillion at the end of June, representing an all-time high. Recurring revenue also registered an all-line high despite the absence of half yearly investment advisory fees. As shown on the bottom right, workplace client assets, which we have established as a new KPI saw steady growth to JPY 10 trillion at the end of June on consistently high inflows from ESOP. Next, let's take a look at investment management. Please turn to Page 10. On the top left, you can see that net revenue rose 14% to JPY 98.3 billion and that income before income taxes rose 148% to JPY 45 billion. In both cases, this was the best performance since the division was established in April 2021. On the bottom left, you can see that business revenue was solid at JPY 86.2 billion. Asset management fees registered an all-time high owing to growth in assets under management. Furthermore, there were steady inflows of funds into newly established emerging market equity funds actively managed by Nomura Asset Management International and collaboration between Japanese and overseas offices with respect to the acquired operations also generated rapid results and made a larger contribution to revenue. investment gain and loss gain or loss also benefited from a much better performance at American-centric investments. Expenses also fell on the disappearance of impairments and onetime acquisition-related costs. posted in the previous quarter. Let's now turn to Page 11 and [indiscernible] asset management business, which is the key source of business revenue for the division. The graph on the upper left shows the asset management show that asset management -- assets under management reached an all-time high of JPY 156.4 trillion at the end of June, supported by favorable market conditions. As shown at the bottom left, net outflows amounted to JPY 1.33 trillion. Net inflows into investment trust, excluding ETFs and MRFs, totaled around JPY 500 billion owing to actively managed Japanese equity trust and newly established actively managed emerging market equity funds, but net outflows from ETFs totaled around JPY 940 billion, mainly from Japanese equity EDF rising equity markets. Domestic investment advisory and international businesses. So net inflows in Japan, mainly into actively managed Japanese equity investment trust and private assets, but net outflows overseas including sustained outflows from mutual funds in line with U.S. market trends as well as outflows from U.S. high-yield bonds, as shown at the bottom right, alternative AUM rose to a new high owing to net inflows. Next wholesale division, Page 12, please. On the top left, you can see that wholesale net revenue rose 20% to JPY 369.1 billion, while incoming for income taxes rose 116% to JPY 93.3 billion. In both cases, this was the best performance since the division was established in April 2010. Global Markets net revenue rose 26%, driven by equities Investment Banking net revenue fell versus the strong previous quarter, but an all-time high for the first quarter of the fiscal year. The revenue to modify the risk-weighted asset ratio rose to 9.3% on flexible allocation of resources in response to market conditions and steady for top revenue opportunities under the self-funding framework. Please turn to Page 13 for an update on each business line. Net revenue in the global markets rose 26% to JPY 318.7 million -- please look at the middle section on the right. Fixed income revenue rose 11% to JPY 139.2 billion. In macro products, rates, revenue rose in EMEA on client activity, while FX emerging market revenues rose substantially in AEJ on increased client flows in spread products, credit revenue rose substantially in Japan and AEJ on increased client activity triggered by tighter spreads, while securitized products revenue came in flat. International Wealth Management revenue also grew steadily on expansion of client base thereby helping to ensure more diverse sources of revenue for global markets. Equities revenue registered strong growth rising 41% to JPY 79.4 billion, owing to the strategic global rollout of businesses that have already been established in certain regions as well as favorable market conditions. Equity products saw strong revenue growth across all regions increased client flows drove growth in derivatives. Elsewhere accurate perceptions of client activity enabled AJ to drive growth in execution services. Let's turn to Page 14 for Investment Banking. As you can see on the top left, Investment Banking net revenue fell 9% to JPY 50.4 billion. but it hit an all-time high for the first quarter of the fiscal year, exceeding JPY 50 billion for the first time since fiscal year 2016/'17, the earliest period for each which data is available. Byproducts advisory revenue fell versus the strong prior quarter but benefited from growth investments and portfolio realignment in Japan and overall multiple deals outside of Japan, including renewable energy-related deals that are a year area of particular focus. In financing and solutions, et cetera, ECM remained at the top of the league table in Japan with contributions from multiple major deals. The business also responded to diverse needs, including the issuance of bond type shares. Elsewhere, the name was widely involved in bond issuance by a broad range of Japanese and overseas issuers while our solutions business also continued to perform solidly. Next, banking division, please turn to Page 15. As shown on the top left, net revenue was up 5% to JPY 15.2 billion and income before income taxes was up 19% to JPY 3.6 billion. Starting from this quarter, we disclosed net revenue broken down into banking revenue and trust and agents service revenue. As you see in the middle of the right, banking revenue rose 19% to JPY 4.1 billion. the balance of deposits and number of accounts grew steadily, owing to the marketing of Deposit Sweep service launched on April 27 and collaboration with Wealth Management. Also, revenue from lending operations grew on a steady increase in loans outstanding and valuation gains on securities holdings also contributed to revenue growth. [ Tristan ] agent service revenue was JPY 11.2 billion. Revenue trended solidly by growth in investment trust balances backed by the launch of new investment trusts and market factors. Next, we turn to KPIs on Page 16. On the top left, loans outstanding were JPY 1.247 billion. Loans outstanding group centered on Nomura web loans, reflecting a growing recognition of securities-backed loans and an increase in the value of collateral accompanying the markets rise as shown at the bottom of the slide, the investment and assets under administration have been growing steadily on the acquisition of mandates for newly established investment trusts and fund inflows have continued on the back of marketing strategy enhancements. Next, expenses. Page 17, please. Group by expenses were JPY 475.2 billion, an increase of about 1% or JPY 5.7 billion from the previous quarter. performance-linked bonus provisions and other compensation and benefits rose but at the same time, other expenses were held down, leading to the capture benefits from operating leverage. Next, financial position. Page 18, please. As shown in the table on the bottom left, at the end of June, common equity Tier 1 capital ratio was 12.9%, up 0.1 percentage point from 12.8% at the end of March. That completes our overview of the first quarter results. In closing, in May this year, we raised our numerical target range for ROE to 10% to 12% or more by 2030 and our target for income before income taxes in 2030 to at least JPY 750 billion of 15.4% in the first was the highest since the April to June quarter of 2020 when wholesale with relatively volatile was making a major contribution to profit amid quantitative easing measures being taken around the world in response to COVID-19 dynamic. In recent years, the net revenue structure has been changing as the exposure to any 1 particular division and the generation of profits has become more balanced across divisions. Stable revenues have expanded roughly 60% from a year earlier, indicating steady reinforcement of income refer income taxes level. In wholesale revenue sources more diversified driven by growth in equity products and securitized products as well as the expansion of the international wealth management business. Although performance may fluctuate to some extent in response to market conditions. We believe the quality of our profit has been steady improving because of restructuring efforts made to date. Let me comment briefly on the situation since July. Market environment has been characterized continued uncertainty amid the renewed heightening of geopolitical risk and the equity market have been -- have seen corrections and increased volatility. Despite these circumstances, net revenue in wealth management has been roughly on par with the first quarter funding inflows to products and services predicated on long-term diversified investments remain firm. In wholesale, net revenue has slowed somewhat of late. This is partly in reaction to strong net revenue in the first quarter, mainly in equities, but also owing to seasonal factors specific to the summer. Nevertheless, the pipeline for the division, as a whole remains favorable. We think market volatility is likely to increase in the second half of the year midterm elections to be held in the U.S. and in view of monetary policy trends in key nations, we plan to monetize opportunities while engaging in appropriate risk and maintaining strict discipline in terms of cost control. Thank you for your continued support.

[Operator Instructions].

I'm Watanabe from Daiwa Securities. I have 2 questions. First, about wholesale revenue. In July, you've explained that it slowed down somewhat comparison to Q1, I believe there are seasonality factors. But on a year-on-year basis, was revenue in July an increase. revenue sources are diversified. And what is your outlook on wholesale revenue? The second is on capital policy based on payout ratio of 40%, with our Q1 revenue DPS of close to JPY 20 securities that the right understanding as income increases with the capital accumulation, ROE will be under downward pressure. Will there be adjustments of capital, including buyback? These are 2 questions.

Thank you, Watanabe-san for your questions. About wholesale revenue, it slowed down a little in July every year because of seasonality in July and in August, according to the past trends, in almost all years, we see some slowdown in summer. Having said so, in terms of year-on-year, how does it compare currently It is more or less flat. So that is my response to your first question. And regarding the second question on shareholder return policy. To be honest, it is only at the end of Q1. And payout ratio perhaps may be too premature to be discussed. Growth investment and enhancement of shareholder return will have to be balanced. In view of that balance, we would like to take this into further consideration. I hope this answers your questions.

Regarding the first question, equity, especially was strong in Q1. Is this momentum -- will this momentum be sustained in Q2 and beyond?

Thank you for the question. As you rightly pointed out, in the first quarter, equities were very strong. Including Bogibrackets periods, also enjoyed multiple favorable conditions that were unique according to these peers. On our part, because of the activities of the market over short term to long term, perhaps there may be a small normalization. In any event, it continues to be the case that equities remain strong. So even though there may be small normalization in comparison to the past level, there may be an upward correction of the baseline.

The next question comes from SMBC Nikko Securities, Mr. Muraki.

I'm Muraki from SMBC Nikko. I have 2 questions. First question is about revenue. This time, Page 13, I'm looking at graph on Page 13, and the performance was driven by equity product revenue. A year so compared to a year ago, it's about double JPY 120 billion. So in what way was the revenue generated even, I'd like to deepen my understanding, if possible, derivatives, structured products and prime finance. So I'd like to know the breakdown. That's my first question. My second question is regarding resource usage. I ask this question every time. But Page 20, overall balance sheet shows that securities-backed lending and the trading assets combined, it's about JPY 4 trillion. And JPY 0.7 trillion. When I look at the pure loans, our balance sheet has grown bigger. In terms of U.S. peers from [indiscernible] client, so there is a very strong need for financing. So they have increased resources, but they cannot keep up with increasing demand from clients. In your case, leverage ratio came down, but it's 0.6%. So compared to regulation, there is still headroom in your case. In this situation, resource management and risk management, what is your approach to them.

Thank you, Mr. Muraki for your question. Regarding your first question, Equities Equity products breakdown, -- so what was the driver for the revenue growth? The detailed breakdown cannot be disclosed, but roughly speaking, finance-related business such as corporate derivative or a prime business and trading type business such as Flow trading and cash business and structure trade. So finance and trading represents 50% each of revenue growth in terms of contribution to revenue growth. It just so happens that in the past, we started with cash and gradually centering on the U.S.A. we have expanded product lineup and geographically, looking at the success in the U.S.A., in Asia, we have strengthened our business. market theme was captured and monetized into revenue in Asia as well. As for [indiscernible] products, in addition to derivatives, financing execution services, and we have expanded product lineup. So the in our situation. The second question, our balance sheet has grown bigger, but our financial resources, especially leverage exposure -- and when it comes to risk management, what is our approach? I believe that was your question. Regarding the balance sheet growing bigger, the reason for that is simply put. Equity business contribution is big as a factor. -- equity business has been quite active, and that led to increase in balance sheet. And as for management of financial resources, -- as you pointed out, leverage exposure still has some headroom. Regarding leverage exposure, unlike CET1. By issuing AT1, leverage exposure can be expanded if we try to do so. But as you know, Muraki-san, regarding wholesale division, we have self-funding framework within which we have certain guidelines about financial resources. And within the guideline, we would like wholesale to grow business. The intent here is our financial resources, so within certain limit or framework within wholesale, we would like wholesale to control resource. So the resource can be focused on the high-margin projects deal so that revenue to RWA ratio can be increased. That is our aspiration. And the group-wide business portfolio -- within the group-wide portfolio, we do not want the concentration into wholesale. So we want to avoid concentration risk. So in wholesale, sometimes, we are flexible in providing wholesale in providing resources to wholesale. But basically, we are aiming to drive growth within the framework set within wholesale. That's how we manage portfolio and risk management risk. And that's going to be our continued approach. So it's not just wholesale that conduct business that use resources. For example, in terms of IM inorganic opportunities, they will use RWA and [indiscernible] Banking division, so these businesses will use more leverage exposure moving forward. So financial resource control will become increasingly important. I hope that answers your question.

Regarding your first point, so you say the derivative business did well, but the derivatives in the 50% of equity business, so it belongs to flow trading. And now derivatives represent a significant portion of the LAT part 50%?

So regarding the breakdown, there is some mixture. So we would like to check the specific details. And then have you keep you updated at some point in the future.

This is Tsujino from BofA. I have 3 questions. First, regarding compensation and benefits since last year, there were some special factors, onetime factors that led to increase in compensation and benefits and this fiscal year onwards, I believe you've discussed that you expect a decline in compensation and benefits. Going forward, how will it trend in Q2 because of changes in bonus, et cetera, will there be a temporary increase in compensation benefits which will come down subsequently? That is my first question. And the second question is about global market from July onwards. In comparison to Q1, it is a bit slow. Wholesale, it is almost flat, but global markets, when we focus only on global markets, FiC in Q1 has increased substantially year-on-year. FIC is relatively flat. When we look at the market, FIC sudden decline is not likely. So FIC versus equity is FIC slows down in summer and if it is lower than Q1. But unless equity suffers from a very sharp decline on year-on-year basis, I don't think there will be a leveling off or plateauing. So could you add color to taken equity separately? And another question is about profit, excluding investment gain and loss. And then about JPY 20 billion is increased Q-on-Q. And the forestry asset is JPY 12.1 billion decrease and acquire acquisition cost, JPY 5.5 billion decline. And so that should lead to improvement. But to begin with, in Q4, Nomura Babcock was extremely strong. And because of such factors, the performance was not so bad, which means that Nomura Babcock this time how normalized was it? How much normalization was there in Nomura Babcock. Could you discuss these developments.

Ms. Tsujino, thank you for your questions. About increase in compensation and benefits, onetime factors occurred last year, as you rightly pointed out. And thus, we also provided information on this, there were several onetime factors, 1 of which is deferred compensation-related factor. And this is a replacement of cash compensation. So this was a onetime factor last year. And gradually, this cost will be leveled off. That is, I believe, how we explained in the third quarter presentation. Actually, as a matter of fact, what we call DCA deferred compensation regarding the cost. Assuming that earnings remains the same, then DC declines, but earnings are improving, rising. So deferred compensation included compensation and benefits are also increasing because of the industry, the nature of the industry, there is some fixed level of compensation and benefits. But in line with the performance, there is also additional compensation and benefits linked to performance. So to an extent, there is some increase linked to performance. And performance has been very strong. So rather than likely decline at this pace, we anticipate some increase. Having said so, in Q1, and there are so many ramping factors for compensation and benefits but there is a stock compensation that will be vested in short term, and that was booked in Q1. And because of that, there was a onetime effect. Regarding the second question about the recent July equity, fixed income breakdown year-on-year, it is about the same and that led to your estimate that equity may have following right now regarding equities due to market corrections, in comparison to the previous quarter, it is coming down. However, it is still at a high level, high level is maintained for equities. As for fixed income, there are investors on the sidelines trying to see the monetary policy of Western countries. And because of market volatility, is leading to more volatile revenue. As for credit and securitized products in the previous quarter from the very high level in the previous quarter, and since there are deals that affect the performance, the number of deals may affect the performance, and that may have had some effect. And I believe you've had question related to IM, as your third question. Factors that led to increase in revenue. In terms of Q-on-Q performance, Babcock had some seasonal factors and there was a slight decline. Babco products typically have a stronger performance in Q3, Q4. In Q1, there was a slight decline. As for contingency fees, there were some strong results, including Ana, Taiwan and AUM increased seed investments, this is similar to proprietary investment and this seed investment also had a good performance. In the meantime, there are some offsetting factors, but I hope this addresses your question.

About seed investment, do you mean that there was a mark-to-market?

Yes, that is correct.

Next in the question is Sato-san from JPMorgan Securities.

I am Sato from JPMorgan Securities. I have 2 questions. First question is about wholesale divisions revenue especially revenue to RWA ratio. 9.3% was the result of Q1. So on a quarterly basis, it's the highest level. And the other day, 2030 compared to 2030 target, the Q1 result was quite high. in terms of the ratio. And you explained the equities business did quite well. But regarding the risk asset mix -- could you add some color to the risk asset mix? When I do calculation backward, adjusted risk assets have not increased much. Actually, it may have decreased somewhat. So I'd like to understand if there is any change to the mix. The second question. In the second half of year, you are scheduled to relocate the headquarters. And what is your latest outlook on the relocation cost at this time will headquarter new headquarter related equipment cost increase was mentioned. And by September, the investment into the retained floor space, about JPY 150 billion or so and accounting wise, it might be an amortization or depreciation, if there is such cost what is going to be the total cost associated with relocation.

Sato-san. First, regarding your first question, revenue to RWA ratio. That level has gone up, but RWA level remains unchanged. So what is the mix. So that was your first question. I understand. Regarding the mix, equity products and SPPC was securitized products and IWM, International Wealth Management resources have been increased. In the area of equities, the resource allocation has been increased. And how we should think about the current situation towards 2030, we have macro business centering on rates and equity business and spread business credit and SPPC. The rough breakdown will be kept and in the medium to long term, we'd like to grow all of them in a balanced manner. But particularly, we would like to grow equity business more in the medium to long term. So in the medium and long term, our portfolio mix target, the target is not going to change much. On the other hand, when it comes to short term, Mike, depending on the themes or situation of markets, the demand for certain products sometimes greatly increase. This time, equities market has been quite active. So financial resources have been reallocated from other businesses to Equities business. This is a sign that wholesales self-funding worked. So where there is opportunities for revenue generation. Headquarters have merged wholesale to make revenue by shifting resources and they are living up to the headquarters' expectations. And U.S. peers included in equities business, demand is bigger than the capacity of balance sheet of each firm. in this kind of situation -- the level of profitability is remaining with firms. I believe, has trended up somewhat. That's my answer to your first question. Regarding your second question about headquarters cost. In the most recent quarter, there was some costs incurred, but headquarter relocation itself will be proceeded with gradually. So the associated costs will be incurred gradually to this fiscal year and next -- we expect certain volume of cost. However, impact on this year's performance is considered to be relatively small while I would like to refrain from speaking about specific number, but at the right timing, we would like to explain the relevant cost both.

So you can give me qualitative remark about ultimate properties and other properties now you are paying rent. Then after you've completed relocation and you've exited the existing buildings, then you will return the floor then on a net basis cost is going to stay flat.