Nomura Holdings Earnings Call Nuggets: Revenues by Region, Restructuring Expenses

On Monday, Nomura Holdings, Inc. ADR (NYSE:NMR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Revenues by Region

Masao Muraki – Deutsche Securities Inc.: I would like to ask two questions. First of all, this is the question I asked on regular basis and that is with regards to revenues by region. Wholesales revenues in totality is shown on Page 10, fixed income and equity. Could you give us a breakdown by region for fixed income and equity? Second question is with regards to dividend. Last year’s full year dividend was JPY6 per share on full year basis. First half dividend was decided on JPY2. What’s the backdrop? Unless the performance outperforms the dividend policy will – to this level of JPY2 dividend be considered as the minimum level the floor.

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Atsushi Yoshikawa – President and Group COO, Wholesale CEO: Then the country breakdown of revenues, first of all, on equity, excluding Instinet, if we count the totality as 100, EMEA accounts for the mid 40% range, 45%, Americas slightly below 30%, Japan approximately 20%. Asia excluding Japan is little less than 10%, that’s the breakdown. As far as fixed income is concerned 30%, 35% is accounted for by EMEA and the Americas also have more than 30%, Japan slightly over 20% and Asia excluding Japan, 15%, plus or minus that’s the breakdown. Then on the second question with regards to dividend policy, I’m not so sure whether I’d be able to give you a straight forward response. Our dividend policy is to provide for stable dividend to our shareholders and taking that into consideration we have decided to pay JPY2, which is the same as the first half in the previous term. With regards to the full year total dividends, well, (indiscernible), all I can say is we will take into consideration the environment, and performance on full year basis, but cost reduction will lead to improvement of our profitability, especially reduction of the breakeven point and also the negative impact of cost reductions to revenue can be controlled and minimized. So far we have been able to do that so top management included we are feeling the outcome of these efforts. As we proceed into second half, we will consider the situation ending positively of returning benefits to our shareholders. So whether JPY2 is the floor, of course we hope to pay more if performance improves. However, then on the other hand, in the second half, we will look at the performance. This is not a fixed level. We will look at the performance and the environment and decide on the specific dividend amount.

Masao Muraki – Deutsche Securities Inc.: I have a follow-up question on both first and second point. First of all, for equity and fixed income, EMEA and the Americas play major role, but what about derivatives related revenues, equity derivatives.

Atsushi Yoshikawa – President and Group COO, Wholesale CEO: I think that the topline is negative.

Masao Muraki – Deutsche Securities Inc.: OTC derivatives regulation will become more stringent in the future. What is your outlook? On Page 12, you mentioned decline. Will you be restructuring this business? And a follow-up questions on the second question, this is not directly linked to dividend, but currently in 2019 basis common stock Tier 1 ratio, I would assume it’s around 8%. Do you consider that the current level of capital adequacy is sufficient, or do you think that further surplus retained earnings is necessary?

Atsushi Yoshikawa – President and Group COO, Wholesale CEO: On equity derivative business, we don’t disclose the substance – the environment was challenging as you had pointed out same applies to turnover and volatility was low and therefore, it was difficult for us to capture opportunities to be profitable and previously equity linked products were being offered but situation prevailed difficult on mark-to-market basis and I think our peers who are dealing with similar products faced a similar environment.

Masao Muraki – Deutsche Securities Inc.: How will the future unfold?

Atsushi Yoshikawa – President and Group COO, Wholesale CEO: I do not have any specific views, but in each derivative team, there had been too much distribution. So we try to concentrate and converge into smaller number of teams and have people responsible and each desk had its own dedicated sales people and traders, but to a certain extent we’ve tried to integrate these multiple teams. In order to improve efficiency in this business or depending on how the market prevails, we try to be more focused and concentrated on the opportunities we capture. So are we going to exit from the derivatives business or parts of the derivatives business? No, that is not the case but we’re trying to reduce cost in order to manage the Group to fit the surrounding situation better and we are trying to adapt to the current market environment. However, if we take into consideration the regulatory trend especially on the derivatives front that are not centrally settled, what kind of initial margin will be charged, various proposals are on the table and therefore we have to be watchful of the regulatory trend and respond to any changes on the regulatory front. On the second point, 2019 exit Tier 1 ratio based upon the 2019 exit criteria according to our stimulation we expect that we would be able to ensure enough capital, of course, risk-weighted asset that is not the core or that is not directly linked to business where we’ll be try to be minimized and also we intend to have a buffer zone in terms of retained earnings, but we think that the current level is sufficient.

Restructuring Expenses

Natsumu Tsujino – JPMorgan: My first point is about the restructuring expenses and how we plan to book it in the future? Today you saw the progress on the presentation for personnel expenses 35%. For this personnel expense you plan to book the figure – the amount of September end. So there will be more expenses – restructuring expenses in accordance to the progress of the restructuring. For the corporate items, the cost of liquidity pool, the unallocated costs, there are very little unallocated cost left. So, right now things have normalized. Is this the way to understand it? My third point, some of the equity earnings of affiliates would be unlisted stocks, the unrealized gains on investments held for operating purposes. Why did you conduct this at this timing? Right now the level of Japanese equities are all lower than people’s theoretical levels, but why did you chose this timing? There are some equities that are under book value, but what methods did you use to revise the value and how many shares or stocks are in this revision – included in this revision?

Junko Nakagawa – CFO: So let answer in order of your three questions. First of all, restructuring expenses, the 35% progress for personnel expense and JPY6.7 billion, yes, your understanding is roughly correct. But as I explained earlier, the personnel expenses reduction in the future also includes the non-replacement of (levers) and we plan to reduce the run rate through various methods. So, we do not plan to achieve the entire amount only through headcount reduction. So you can’t really modify the 65% against the JPY6.7 billion. Also last year’s restructuring, we plan to conduct further restructuring on top of last year’s restructuring. We would like to execute these reductions quickly and without a big timeline following the press release. There will be restructuring expenses booked in relation to the progress. We’re expecting further expenses in relation to the restructuring, but the actual amount will not just be a multiple of two numbers. As for the liquidity pool, as we promised, we have been persuading the front offices and been allocating the costs, but there are some – there is some liquidity pool which we have to maintain, which is not exactly related to the business segments only in relation to the regulations. There still is some unallocated expenses in corporate items and we do not expect this to go down to zero unless there is a big deregulation in the future. Going forward, we will revise the booking entities on a global basis and reduce the unnecessary costs in the future. Your third point about the investment securities, and also why now was your question, I guess. For the unlisted stocks, we believe the situation allows us to conduct more accurate mark-to-market valuations and we had to review all of the values of the unlisted stocks on our books and we have been discussing with our accountants and based on the information that we have collected and also using a more accurate model, valuation model, we decided to objectively revalue these unlisted stocks. That’s the conclusion that we reached and we decided to revalue those values.

Natsumu Tsujino – JPMorgan: How many stocks are in this program?

Junko Nakagawa – CFO: We cannot give you the exact figure but the total investment securities there are about 380 stocks in the inside pool.

Natsumu Tsujino – JPMorgan: But most of those are listed equities, right?

Junko Nakagawa – CFO: Well, of course, the half are unlisted.