Daiwa Securities Group Inc

OTC:DSECF

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 Oceania 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 flow-based revenues 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 wraps.

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. This slide represents sales and distribution amount by product in the Domestic Wealth Management division. Wrap account services, contract value was JPY 418.2 billion and 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 wrap 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 Daiwa Next Bank. Net interest income, et cetera, came to JPY 13.4 billion, up 3% and ordinary income was JPY 7.8 billion, up 8.5%, both 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 withdrawals of maturity proceeds.

Please turn to Page 18. This slide shows the results of ORIX 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 ordinary 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. 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%. While revenues increased on the back of 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 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 Realty and Samty.

Please turn to Page 21. Next, Alternative Asset Management. Net operating revenues were JPY 3 billion and ordinary 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 ordinary 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 performance remained solid. In equity derivatives, despite lower volatility, we captured client 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, client flows decreased due to rising U.S. interest rates and challenging position 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 overall results, enabling us to secure an annualized ROE of 11.3%. With market partially correcting amid 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 wrap account services reached a record high for a quarter. Although client activity declined due to factors such as correction in the tech 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 sense that client demand for medium- to long-term asset building and diversified investment remains strong. Since the start of October, wealth 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 steadily building our deal pipeline.

In addition, ORIX Bank became a wholly owned subsidiary of Daiwa Next Bank on August 3 and has been consolidated since the second quarter. The addition of lending capabilities will diversify our revenue 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 would 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] I would like to introduce the first question, SMBC Nikko Securities, Muraki-san, please.

Thank you very much, Muraki-san, for that question. The individual customers and also for the corporate customers for both of them. 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. In comparison to Q1, there was a slight decline.

But if you look at on a half-on-half basis, JPY 800 billion for this past half, last year, second half was JPY 900 billion. Also that last year's first half was JPY 700 billion, and the second half of 2024 was JPY 700 billion. Actually, we're trending at a high level between JPY 700 billion to JPY 800 billion. Also in terms of the asset under management, it has been steadily increasing. 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.

Where that is most contiguous is in the equity investment trust and fund wraps. In terms of the net inflows, the net increase, net sales, it was a record high. 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. The needs have been very strong. Recently, our take is the customers' needs is 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.

I believe the interest of the customers have shifted especially for those high net worth customers, we believe those needs are becoming more prominent. Given this into consideration, we are promoting this total asset consulting and a result of that fund wraps and the equity investment trusts have been chosen by the customers.

As for the Daiwa Next Bank, the deposit balance has come down. As related to that, again, the cross sales to securities has been promoted. For the second quarter, the corporate bonds and also JGBs, there's been more outflow to the bonds and also transfer to some fund wraps. We are seeing those movement. If you look at 12 months ago or a year ago, some of the time deposit, which we collected about a year ago during the campaign, substantial amount has actually reached maturity in second quarter.

About 70% was the in Daiwa Securities in terms of how they were able to retain. But the 30% of the customers or the flow -- they actually -- it was an outflow to other financial institutions. There was an outflow to the securities or also to other banks. 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. We're not exactly seeing change in the trend.

Your question related to how sustainable this trend is. More of this total, the asset consulting will be continuously promoted. Also, we would like to enhance the quality of consulting to the customers in the hopes of gaining trust from the customers, which would lead to long-term relationship. We would like to make sure that, that sustainability is maintained.

Also related to the second part of your question, for the months of July, August and September trend, as far as the 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. As far as Japanese equity is concerned, the Nikkei average has come down for the 3 months. However, top picks went up. There were rotations of different names.

In the months of July and August, the volatility has come up. However, there has been a portfolio rebalance. We have seen those both from the institutional investors and the individual investors. On a relative basis, it was at a high level. In terms of the proportion of July, August and September, it's about 40%, 30% and 30% in terms of the breakdown. As far as the FICC is concerned, Q2 crossed the second quarter, that is. As far as the domestic bond business is concerned, the revenue has increased in comparison to Q1.

The interest rate -- now that interest rate is turning positive, now that we're seeing an inflationary trend. There is more need towards bond and those products with yield. There has been more flow towards those products. There's been rebalancing needs of the institutional investors, and we've been able to successfully capture those. That is why the revenue has increased on a Q-on-Q basis.

September, the month of September. In terms of the capital, the market, the Americas FICC business, the U.S. -- the Treasury, the interest rate has come up. Also with the discounting and the credit spread, there has been some challenges in terms of the positioning. Also with the rise in the interest rate, the U.S. residential loans has come down. Therefore, because of the decline in the flow, there has been some challenges in terms of the mortgage-related businesses.

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. In comparison to the average of Q2, the month of October, of course, it is just the starting point. I'm just sharing with you the current image. It is a slow start, let's just say, for the month of October. That is all.

As far as the global market is concerned then, the month of October, the interest rate has come down. It's not a simple explanation then. With the interest rate going up, that is -- so what sort of impact it has. So it's not that -- that is correct. It is not a simple direction. We should look at the customer flow and also the positioning in anticipation of those customer flow. There's not necessarily the correlation with the interest rate ups or downs. The overall flow, potentially, of course, there is a possibility of various events in autumn after they are completed, we are hoping that we will get back to more of a normal mode.

Mr. Muraki, thank you so much for the questions. Next questions are from Tsujino-san, BofA Securities.

Tsujino-san, thank you so much for the questions. In terms of the alternative asset management, gains or losses from sale of marketable securities, both gains and losses, or marketable securities, Daiwa PI Partners, that was a big one and also Daiwa Energy Infrastructure for the renewable assets, so those are the specific losses. Amount is similar to the number that you have mentioned. It's not the amount that you mentioned Tsujino-san.

For renewable energy in Japan and internationally, in both markets, relatively speaking, there's a 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. Thus, although the tariff is fixed, however, cost is increasing. Overall, this business model is facing the difficult situation at the moment from the beginning of this fiscal year.

With that situation, we have revalued the valuation of assets that we own, which we do every year. In this process, sometimes we have devaluation 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, slowness in October. It's not that interest rates have come down. The situation is not strong for fixed income and equity because of the interest rates, as I answered the first person's question, depending on the direction of the interest rates, it does not directly impact the trading position directly. But as you mentioned correctly, in the equity business, U.S. stocks, retail investor trading from August to September, the trading declined in volume, but it's coming back at the moment for the U.S. stocks. It's been only 1 month. 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. Sasaki-san from Nomura Securities.

Sasaki-san, thank you very much for that question. ORIX Bank on a stand-alone basis, the loan-to-deposit ratio exceeding 100%. That has been the case prior to consolidating ORIX Bank. Because of that situation, they were facing some challenges in expanding their lending. Right now, 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. With becoming the subsidiary of Daiwa Next Bank, with the Daiwa Next Bank and the BOJ current the account, they're already starting to use that for the lending for ORIX Bank. 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's held as a deposit or held as the bonds or securities or investment trust, there are different ways that revenues could be posted. We cannot paint it. 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. It really goes down to what are the needs and demands of the customers.

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. That is also reflected in the incentives of the salesperson as well. 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. Rather than proposing a single product to the customer, we are proceeding with the total solution provision.

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 JGB, it could be considered as an entry point to further securities investment. Again, we'd like to propose products that are best fitted for our customers.

I cannot comment on the individual deals. But as of today, what has been disclosed for this particular property, equity token, STO, about JPY 300 billion. We will underwrite the ST and Daiwa Securities has been selected for that. The securities, the demand towards real estate continues to be high. By using the security token and more of a smaller-sized retail products, the need continues to be high. Also, the property has a very well known. We believe this is significant in providing various investment opportunities to Daiwa Securities customers. There are some information that has not been disclosed. We would like to refrain from making -- providing you with further information.

Mr. Sasaki, thank you so much for your questions. Next questions are from JPMorgan Securities. Sato-san, please go ahead.

Mr. Sasaki, (sic) [ Sato ] thank you so much for your questions. To your first question, the capital ratio, in the presentation that we distributed today, this is capital ratio as of the end of June, 21.04% and the Basel III finalized impact and ORIX consolidation impact pushing down capital ratio, including all of that, as you pointed out correctly, at the end of September, capital ratio is probably down to around 14% or so. The maintenance of the financial soundness and need to invest for future growth. We'd like to recover some buffer capital. We'd like to gradually recover our capital level.

Therefore, at 11:30 today, we have announced AT1 bond, then the announcement and the amount of the funding, it depends on the needs from investors, but it's going to be probably JPY 100 billion to JPY 120 billion in that range. Also with the AT1 bond and also annual profits will help recover our capital ratio. AT1 issuance will increase the capital ratio by about 1% and annual profit is going to increase the capital ratio by about 1%. That's the rough image. We have to think about the pipeline for future investments. We'd like to continue to monitor the capital level.

Also relating to the shareholders' returns, in principle, there is no change to our capital return policy. We'd like to look at soundness of financials, growth investments needs and also return to investors. We'd like to strike a good balance among the 3. Extraordinary profit in 2019, we have started to form alliance with Credit Saison but there is no plan to change our stance to the partnership. Fintertech, which is a crypto asset-backed loans, that's the business that we work with them. Also Daiwa Connect Securities, we work with them as well in the partnership to defer customers to each other. This alliance with them is going to continue. That completes my answer.

To the second part of your answer, so simply compared with the acquisition cost from TSE, the price has increased. You wanted to control your total exposure. Is that the reason why you sold a part or you stake. Well, business partnership with Credit Saison is always under review on a regular basis. At the beginning, we wanted to work with them in varieties of business areas and the Fintertech and Connect partnership generated good results to some extent, but there were some other businesses that need some review or revisit in some other business areas.

Therefore, from that perspective, we've been reviewing strategically held equity stocks and we are considering capital efficiency. We decided to lower our stake in them, which is mutually discussed.

I would like to move on to the next question, SBI Securities, Otsuka-san.

Otsuka-san, what you mentioned, definitely, we do perceive that. In terms of the investment trust, there's been -- if the general -- the price goes up, of course, some of the customers would choose to sell. But of course, if the general -- the price comes down, then there will be less customers selling.

That is correct. It doesn't match because there are various ways in terms of net asset inflows. We have primary products, and we have products but also, we have the stocks and also some of the movement of the corporate customers. If you have one of those sort of a mass movement, it may actually move against the general trend. It doesn't necessarily coincide.

I think what you outlined is true. Domestically for the straight bonds and also for the institutional bonds in terms of the issuance, last year in the previous year, it was about JPY 20 trillion on a full year basis. But the first half already, we have issuance of JPY 13 trillion, if not JPY 14 trillion because interest rate is expected to rise. The issuers are actually trying to issue at the earliest ways possible ahead of that. Basically, gross investment that cannot be accommodated through corporate lending, they are also issuing the bonds, not just in the domestic, but also for the overseas market.

Now for the pipeline, it is progressing higher on a year-on-year basis. Actually, it is increasing in terms of the number of cases and also -- the number of deals and also in terms of the amount. There's definitely a strong demand for funding. In terms of the individuals, also in terms of the sales amount, of course, that is the backside of the coin to some extent. Recently, there's been a rise in needs for the JGB for individuals. For Wealth Management, we are providing those stable yield products as well.

That is correct. Higher the underwriting amount, the debt-related commission should rise as well.

Next question from UBS Securities. Niwa-san, please go ahead.

Mr. Niwa, thank you so much always for your questions. Base income, Wealth Management, Securities, Asset Management, Real Estate Asset Management. This is the total of the ordinary income of those. But in Q2, Wealth Management division of Daiwa Securities. We talked about investment trust net increase has been doing very strongly. However, looking at Q-on-Q, the stock brokerage and investment trust sales income has been down by more than 10% Q-on-Q.

Securities Asset Management, AUM has been growing very steadily. However, there's one-off devaluation loss associated with Daiwa Asset Management, where they conduct investment advisory business together with JP Life and this is sort of investment of seed money from the R&D type of perspective. There was some impact on the fluctuation of that. For the base income, this is impacted by the market environment to some extent. There's always fluctuation like this.

If you look at the graph on Page 8, there's no steady increase always in every year, although the fundamental trend is the increasing trend. But if you look at the Q-on-Q breakdown, there are some fluctuations always, asset inflow, net inflow and AUM. We've been trying to focus on those and also customer AUM to increase base income. Also in the second quarter, was included in base income is the contribution of the profit from ORIX Group, which is newly consolidated after deducting the amortization of goodwill. With that included, we'd like to focus on expanding base income in the future.

To your second question, shareholders return in the second half, looking at the capital ratio, which is around 14% at the end of September and considering the future pipeline for investments for growth and also we look at financial fundamentals, we have to consider the soundness of financials because credit rating agencies after the acquisition of ORIX Bank put some watch on us. We'd like to balance among those factors to strengthen the fundamentals of financials. But in terms of the shareholders' return policy, there's no change to the basic policy as we accumulate more profits. If we don't see any investment opportunities, we'd like to conduct the share buyback flexibly and there's no change to that. So that completes my answer.

[Operator Instructions] There seems to be no more questions. So with that, we would like to conclude the Q&A session. Thank you very much for staying with us until the very end. I ask for your continued support to Daiwa Securities Group.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]