Daiwa Securities Group Inc. Q2 FY2027 earnings call

Consolidated Financial Results:

• Net operating revenues increased 1.6% year-on-year to JPY 223.9 billion.
• Ordinary income decreased 11.2% to JPY 78.2 billion, primarily due to lower capital gains in alternative asset management and reduced overseas FICC revenues.
• Profit attributable to owners of parent fell 8.8% to JPY 51.4 billion, with an annualized ROE of 11.3%.
• Base profit, a key KPI for stable earnings, rose 41.9% year-on-year to JPY 62.3 billion, reaching over 80% of the medium-term target of JPY 150 billion on a half-year basis.

Wealth Management & Daiwa Next Bank:

• Record-high net inflows of JPY 312.6 billion, marking the 11th consecutive quarter of positive flows.
• Significant shift from savings to investments, particularly into equity investment trusts and fund wrap services.
• Wrap account contract AUM reached a record high of JPY 6,946.9 billion.
• Daiwa Next Bank ordinary income hit a record high of JPY 7.8 billion, though deposit balances declined as funds moved to securities investments.

ORIX Bank Consolidation:

• ORIX Bank, fully consolidated since Q2, contributed JPY 6.7 billion to the Wealth Management division’s ordinary income after goodwill amortization.
• Standalone ORIX Bank ordinary income grew 20.5% to JPY 8.3 billion.
• The acquisition diversifies revenue sources by adding lending capabilities to the group’s wealth management core.

Global Markets & Investment Banking:

• Global Markets faced headwinds in overseas FICC due to rising U.S. interest rates and challenging position management, though domestic bond business remained solid.
• Global Investment Banking saw profit growth driven by strong debt underwriting activity and domestic M&A deals.
• Equity trading captured institutional flows despite global market volatility.

Wealth Management Division: Net operating revenues were JPY 99.2 billion (up 12.5%); Ordinary income was JPY 39.7 billion (up 6.6%). This segment contributed significantly to the group's stability, driven by record-high asset-based revenues of JPY 38.3 billion and net inflows of JPY 312.6 billion. Asset Management Division: Total Net operating revenues were JPY 37.9 billion; Ordinary income was JPY 23.8 billion. Securities Asset Management reported JPY 22.9 billion in revenue (up 7.9%) but JPY 12.8 billion in ordinary income (down 18.3%) due to valuation losses. Real Estate Asset Management posted JPY 12 billion in revenue (down 9.7%) and JPY 9.8 billion in ordinary income (down 0.3%). Alternative Asset Management recorded JPY 3 billion in revenue and JPY 1.2 billion in ordinary income, impacted by renewable energy investment losses. Global Markets and Investment Banking Division: Global Markets reported JPY 45.7 billion in revenue (down 15.1%) and JPY 11.1 billion in ordinary income (down 38.6%), weighed down by overseas FICC performance. Global Investment Banking achieved JPY 23.4 billion in revenue (up 3.4%) and JPY 4 billion in ordinary income (up 22.7%), supported by debt underwriting and domestic M&A.

• Management expects client demand for medium-to-long-term asset building and diversified investment to remain strong in Q3.
• Wealth Management is projected to continue performing well based on early Q3 trends starting in October.
• Global Markets are anticipated to face slower momentum compared to Q2 due to current market conditions, though management hopes for a return to normal modes later in autumn.
• Global Investment Banking aims to steadily build its deal pipeline to support future revenue growth.
• No specific numerical guidance for full-year revenue or profit was provided, but the focus remains on expanding base income through deepening client relationships and increasing AUM.

• Market Volatility: Fluctuations in equity markets and interest rates negatively impacted flow-based revenues and caused valuation losses in alternative assets, specifically in renewable energy infrastructure projects due to rising procurement costs.
• Interest Rate Sensitivity: Rising U.S. interest rates challenged overseas FICC positioning and reduced mortgage-related business flows, while domestic rate changes affected bond product demand and pricing strategies.
• Capital Adequacy: The consolidation of ORIX Bank lowered the regulated capital ratio to approximately 14% at the end of September, necessitating the issuance of AT1 bonds to restore buffers and maintain financial soundness ratings.
• Deposit Stability: Declines in Daiwa Next Bank deposits indicate a risk if the shift toward securities investments slows or if customers withdraw funds to other institutions, although cross-selling efforts aim to mitigate this.

Q: Is there evidence of an accelerating shift from savings to investments, and how sustainable is the trend? / A: Yoshida confirmed that the shift from savings to investments is accelerating, particularly into equity investment trusts and fund wraps. He cited record net inflows of JPY 312.6 billion in Q2 and noted that customer needs are shifting toward total asset consulting rather than just product purchases. This trend is expected to be sustainable as the firm continues to promote high-quality consulting to build long-term trust and retain assets.