Nomura Holdings, Inc. (NYSE:NMR) Q3 2024 Earnings Call Transcript

Nomura Holdings, Inc. (NYSE:NMR) Q3 2024 Earnings Call Transcript February 1, 2024

Nomura Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Takumi Kitamura: Good evening, this is Takumi Kitamura, CFO of Nomura Holdings. First, I would like to extend my heartfelt condolences to those affected by the Noto Peninsula earthquake and pray for a swift recovery from this disaster. I will now give you an overview of our Financial Results for the Third Quarter of the Fiscal Year ending March 2024 using the document titled Consolidated Results of Operations. Please turn to Page 2. Group net revenue increased 9% quarter-on-quarter to ¥400.2 billion, while income before income taxes grew 39% to ¥78.7 billion. Net income was up 43% at ¥50.5 billion and as you can see on the top right, performance bottomed out in the fourth quarter last year and has continued to improve since then.

The third quarter proved to be somewhat of an emotional rollercoaster for market participants over the possibility of the FRB moving away from its tightening stance. This, combined with tensions in the Middle East, resulted in elevated volatility in equity markets and heightened uncertainty. Inflation in the US slowed towards the end of the quarter, raising hopes of an exit from the sharp rate hikes over the past two years and driving robust performance in equity markets. In fixed income markets, we also started to see a recovery in the issuance of securitized product as interest rates fell and credit spreads tightened. Interest in Japan remained high. Activity picked up among not only institutional investors, but also corporates and individuals over expectations of a monetary policy shift, various actions by corporates to improve capital efficiency, and reduce strategic shareholdings, and investment momentum in the lead up to the introduction of the new NISA scheme.

Amid this environment, we played to our strengths by fully leveraging our extensive client franchise in Japan and our global network to deliver products, services, and solutions tailored to the needs of our clients. This resulted in strong momentum across our three core businesses. Before I go into the details of performance of each business, please take a look at the bottom right which shows three segment income before income taxes of ¥70.5 billion, up 16% over last quarter. Our international wholesale business reported an uptick in client activity towards the end of the quarter and all international regions had a profitable quarter. Diluted earnings per share for the quarter was ¥16.1 and return on equity was 6.2%. While this represents a positive trend towards improved performance, we are still not where we want to be.

With this momentum in performance and given our sufficient capital base, today, we resolved to set up a share buyback program in order to raise capital efficiency and secure a flexible capital management policy, and to deliver shares on exercise of stock-based compensation. The program will run from February 16th to September 30th and have an upper limit of 125 million shares with the upper limit of the aggregate amount of the repurchase price being ¥100 billion. Please turn to Page 3, update of results for the nine months to December. Net revenue for the period was ¥1,116.9 billion, up 11% compared to the same period last year. Income before income taxes increased 43% to ¥181.8 billion, while net income grew 28% to ¥109.1 billion. EPS was ¥34.69 and ROE was 4.5%.

As shown on the right, three segment income before income taxes rose 69% to ¥159.7 billion. Income before income taxes in retail jumped 3.5 times and in investment management, it increased 56%. Now, I will turn to business performance in the third quarter, starting with retail on Page 6. All the percentages I mention from now refer to changes compared to the second quarter. Retail net revenue increased 4% to ¥102.6 billion yen and income before income taxes was ¥31.9 billion, marking the highest level in eight years since the July to September quarter in 2015. The reallocation of our partners last spring has delivered steady results and we are starting to see good signs in terms of the quality and quantity of our dialogue with clients. As you can see on the bottom left, flow revenue increased 7% to ¥64 billion, spurred on by strong equity related revenues due to favorable market conditions and primary transactions such as the offering by Denso.

See also 10 Highest Quality Egg Brands in the US and 15 Highest Quality Creatine Supplements of 2024.

Q&A Session

Recurring revenue, an area of strategic focus was in line with last quarter’s record high. Although revenues were up 4%, expenses increased by only 1% and our recurring revenue cost coverage ratio remains high at 55%. Please turn to Page 7 for a breakdown of sales by product. Total sales were down 9% at ¥4.7 trillion, but remained high and strong. Sales of stocks were ¥3.1 trillion, substantially higher than the level seen before the first quarter, with this quarter being a notably strong one for primary subscriptions. Insurance sales were at a record high. As we continue to provide consulting for our clients’ overall portfolio, we are seeing more clients use insurance products for estate planning and retirement funds, which is another benefit from reallocating our partners.

Please turn to Page 8 for an update on KPIs. Net inflows of recurring revenue assets shown on the top left was ¥51.4 billion. This was lower than last quarter as the market rally and rising rally of priced products prompted large sales and exits. However, excluding corporate section, net inflows remained high at ¥151.5 billion. The top right shows recurring revenue assets at a record high of ¥21 trillion and recurring revenue, which represents stable revenues, remained strong. Flow business client numbers shown on the bottom left were particularly strong this quarter as we saw the benefits of reassigning sales partners and enhanced dialog with clients on the back of primary transactions. Flow business client numbers at the end of December were trending 15% above the same period last year at 1 trillion and 456,000 [ph], which is approaching our March 2025 KPI targets.

Our business for salaried employees, or workplace business, continued to grow steadily. The number of services delivered was approximately 3.6 million, driven by growth in ESOP participants. Please turn to Page 9 for an update on Investment Management. Net revenue decreased 14% to ¥38.9 billion and income before income taxes declined 33% to ¥15.6 billion. As you can see on the bottom left, stable business revenue was ¥33.3 billion, in line with last quarter, which was a record high since the division was established in April 2021. Investment gain/loss declined to ¥5.6 billion as American Century Investments related valuation gain/loss slowed. Please turn to Page 10 for an update on the asset management business, which is the source of business revenue.

As shown on the top left, assets under management totaled ¥78.5 trillion at the end of December, representing a record high for the third straight quarter. This is above our March 2025 KPI target of ¥75.8 trillion. On the bottom left, net inflows were ¥330 billion, with the investment trust business reporting ¥60 billion of outflows. This was due to an increase in sales to lock in profits on the back of the market rally. MRFs and other money market funds reported ¥70 billion of inflows as individuals parked more idle funds. The investment advisory and international businesses booked inflows of ¥385 billion. Japan reported inflows into yen bond funds, while internationally we saw inflows into US high yield bond funds and India equity funds.

Alternative assets under management shown on the bottom right stood at ¥1.6 trillion, down slightly due to yen appreciation at the end of the quarter. That said, inflows continued and we are making progress with our private market initiatives. Please turn to Page 11 for wholesale. Net revenue increased 6% to ¥217 billion. Income before income taxes was ¥23 billion, up 178%. Performance is improving after having bottomed out in the fourth quarter of last fiscal year. Although bonus provisions increased in line with performance, wholesale non-interest expenses decreased 1% as severance related expenses declined and we saw the benefits of cost reductions carried out through to last quarter. As a result, our cost to income ratio dropped to 89%.

Please turn to Page 12 for an overview of results by business line. Global markets net revenue was roughly flat at ¥171.6 billion. Fixed income revenues increased 7% to ¥103.5 billion. As I mentioned earlier, during the first half of the quarter, market participants remained on the sidelines over uncertainty surrounding monetary policy and geopolitics, but we executed client orders while stringently managing risk. Heading into the second half of the quarter as we gained clarity on the outlook for interest rates, market participant activity improved and we saw an increase in revenue opportunities. While market conditions weren’t easy, we booked stronger revenues across all core products such as rates, FX/EM, securitized products, and credit.

Equities net revenue slowed 8% to ¥68.2 billion. Equity products had a strong quarter in the Americas, but revenues were lower in Japan and AEJ on muted volatility and client activity. Execution services continued to deliver solid performance in Japan, while contributions from primary transactions and higher trading volumes on the back of heightened interest in Japanese equities from domestic and foreign institutional investors. Please turn to page 13 for investment management — investment banking results. Net revenue was ¥45.4 billion, up 36% driven by strong performance in Japan and EMEA. This represents the best quarter since the fiscal year ended March 2017 when comparisons are possible. As shown on the left, advisory and financing and solutions both reported revenue growth.

In advisory, we topped the 2023 M&A league table, supporting numerous transactions including management buyouts of Benesse Holdings and Outsourcing and Bain Capital’s sale of its stake in Nichii Holdings to Nippon Life Insurance. In financing transactions, we supported the efforts of corporates to strengthen their corporate governance through deals such as a large offering by Denso and an international offering by Asahi Group. We provided a diverse range of solutions for issuers, taking up the challenging of structuring new fundraising methods such as bond type class shares issued by SoftBank and a digitally-tracked green bond issued by Hitachi. Please turn to Page 14 for an overview of non-interest expenses. Groupwide expenses increased 3% to ¥321.5 billion.

Compensation and benefits increased 2% to ¥170.6 billion. Although severance related expenses declined, the increase is due to yen depreciation and higher bonus provisions in line with improved performance. Please turn to Page 15 for an overview of our financial position. Tier 1 capital shown in the table on the bottom left was ¥3.4 trillion. Risk weighted assets were ¥18.4 trillion. Our Tier 1 capital ratio was 18.3% and we had a common equity Tier 1 capital ratio of 16.2%, underscoring that we continue to maintain a robust financial position. That concludes the overview of our third quarter results. To sum up, spurred on by structural changes in the Japanese market, in the third quarter we were able to deliver steady results by leveraging our strengths, centered on our home market and the strategic initiatives we have been implementing.

Retail had its best set of results in eight years and investment banking revenues were at record levels as we provided a wide range of support for various corporate actions by Japanese companies. The Nikkei has continued to rally into 2024 and we get a real sense that the new NISA scheme has been a catalyst to kick start a full-fledged shift from savings to asset formation. In just the three weeks to last week, we saw NISA sales at over one third of annual sales for 2023. We expect Japanese corporates to step up efforts to enhance their corporate governance and raise capital efficiency and many corporates are coming to use for advice. Factoring in expectations of policy action by the Bank of Japan, we expect to see the good momentum of our Japan business continue.

Our international business, in particular macro products, has had a tough time due to monetary tightening over the past two years. However, as interest rates finally peak out, we started to see signs of improvement towards the end of the quarter. In 2024, as market participants’ idle funds and pent-up demand takes off, we expect this positive trend to continue, albeit with different intensity in each region. In January, retail revenues have remained around similar levels to the third quarter, while wholesale revenues are outpacing the third quarter, driven by solid performance in rates in the Americas and equity derivatives in each region. When tailwinds are behind us in both Japan and overseas, it is a good time to tackle long-term issues.