Daiwa Securities Group Inc. Q2 FY2027 earnings call

Financial Overview:

• Consolidated net operating revenues rose 1.6% to JPY 223.9 billion.
• Ordinary income declined 11.2% to JPY 78.2 billion, primarily due to lower capital gains in alternative asset management and weaker overseas FICC performance.
• Profit attributable to owners of parent decreased 8.8% to JPY 51.4 billion, with an annualized ROE of 11.3%.
• Base profit (KPI for stable earnings) reached JPY 62.3 billion, up 41.9% year-on-year, contributing over 80% of the medium-term target of JPY 150 billion on a half-year cumulative basis.
• Interim dividend set at a record high of JPY 39 per share (50.3% payout ratio).

Operational Highlights:

• Wealth Management continues to drive stability, with asset-based revenues hitting record highs due to consistent client capital inflows into equity investment trusts and fund wraps.
• Net sales (net inflows) for wrap accounts and equity investment trusts reached quarterly records, demonstrating a strong shift from savings to investments among clients.
• ORIX Bank consolidation is complete; it contributes to diversified revenue streams through lending capabilities, though its inclusion increased SG&A expenses.
• Global Investment Banking showed resilience with profit growth in debt underwriting and domestic M&A, despite headwinds in Global Markets' overseas FICC operations.
• Total Asset Consulting strategy is gaining traction, particularly among high-net-worth individuals, leading to increased adoption of portfolio diversification tools like fund wraps.

Wealth Management Division: Net operating revenues were JPY 99.2 billion (up 12.5% QoQ), and ordinary income was JPY 39.7 billion (up 6.6% QoQ). This segment contributed approximately 44.8% of consolidated net operating revenues. Asset-based revenues hit a record high of JPY 38.3 billion, driven by record net inflows of JPY 312.6 billion into equity investment trusts and fund wrap services. Daiwa Next Bank posted record-high ordinary income of JPY 7.8 billion, while the newly consolidated ORIX Bank contributed JPY 6.7 billion to ordinary income after goodwill amortization.

Asset Management Division: The division saw mixed results. Securities Asset Management reported net operating revenues of JPY 22.9 billion (up 7.9% QoQ) but ordinary income fell to JPY 12.8 billion (down 18.3% QoQ) due to valuation losses. Real Estate Asset Management recorded net operating revenues of JPY 12 billion (down 9.7% QoQ) and ordinary income of JPY 9.8 billion (down 0.3% QoQ), with AUM reaching record highs. Alternative Asset Management had net operating revenues of JPY 3 billion and ordinary income of JPY 1.2 billion, impacted by lower capital gains from exits and devaluation losses in renewable energy investments.

Global Markets and Investment Banking Division: Global Markets posted net operating revenues of JPY 45.7 billion (down 15.1% QoQ) and ordinary income of JPY 11.1 billion (down 38.6% QoQ), with declines in overseas FICC revenue. Global Investment Banking achieved profit growth, with net operating revenues of JPY 23.4 billion (up 3.4% QoQ) and ordinary income of JPY 4 billion (up 22.7% QoQ), driven by debt underwriting and domestic M&A activity.

• Management anticipates continued strong demand for medium-to-long-term asset building and diversified investment in Wealth Management during the third quarter.
• Global Markets are expected to face continued pressure from market fluctuations and rising U.S. interest rates, resulting in slower performance compared to Q2.
• Global Investment Banking pipeline is steadily growing, with expectations for increased debt underwriting commissions as issuers rush to lock in funding before potential rate hikes.
• No specific quantitative financial guidance for the full fiscal year was provided beyond the existing medium-term plan targets, but management emphasized maintaining the upward trajectory of base profit.

• Market Volatility: Fluctuations in equity markets (e.g., tech stock corrections) and rising interest rates negatively impact flow-based revenues and trading volumes in Global Markets.
• Valuation Losses: Alternative Asset Management faces impairment risks, specifically in renewable energy investments where rising procurement costs challenge fixed-tariff business models.
• Interest Rate Sensitivity: Rising U.S. interest rates have reduced client flows and created challenges in position management for overseas FICC businesses.
• Capital Adequacy: The consolidation of ORIX Bank initially pressured the regulated capital ratio down to approximately 14%, necessitating immediate AT1 bond issuance to restore buffers.
• Credit Risk: Exposure to specific counterparties or asset classes, such as the re-evaluation of stakes in Credit Saison, requires ongoing strategic review to ensure capital efficiency.

Q: Is the decline in Daiwa Next Bank deposits indicative of an accelerating shift from savings to investments, and how sustainable is this trend? / A: Yes, the shift is accelerating and strengthening. Net inflows remain robust at JPY 700-800 billion per half-year, driven by 'Total Asset Consulting' which appeals to high-net-worth clients seeking long-term asset structuring rather than just product purchases. While some funds flowed to other banks upon maturity, the core momentum toward securities investments via equity trusts and wraps remains strong and sustainable.