TEXT-S&P rpt:Japan's mjr securities grps may struggle to lift revs
(The following statement was released by the rating agency)
Aug 08 - The results of Japan's four rated major securities groups fell sharply in the first quarter of fiscal 2012 (April 1 to June 30, 2012) from the previous quarter, when a recovery in the global financial markets boosted revenues and profits, Standard & Poor's Ratings Services said in a Japanese-language report published today. We believe that their wholesale businesses will remain weak because of a structural slowdown in global capital markets revenues. Meanwhile, although the profits from their retail businesses declined, they remained in the black because revenues from retail businesses are relatively stable.
In our view, the recent slowdown in global capital markets revenues is more structural than cyclical (for more details, please see "The Weakness In Capital Markets Revenues Appears More Structural Than Cyclical," published July 2, 2012). Therefore, it may be difficult for financial institutions to bring their capital markets-related revenues back up to levels seen before the global financial crisis. Compared to global investment banks, the business models of most of the securities companies in Japan depend less on capital markets revenues. However, lower stock prices and risk-adverse investors have affected the performances of both the wholesale and retail businesses. Nomura Holdings Inc. (BBB+/Stable/A-2) and Daiwa Securities Group Inc. (BBB/Negative/A-2) booked losses in their respective wholesale segments. Nomura and Daiwa are in the midst of their cost-cutting plans, which are focused on their wholesale segments, and they are ahead of their respective schedules for trimming costs. Nevertheless, they have been unable to absorb the negative effects of the market weakness, and they expect any improvement in their performance to hinge on a market recovery. In our opinion, as Nomura and Daiwa struggle in their wholesale businesses, they face the task of reforming their cost structures by reducing costs further to secure steady revenues even in weak market conditions.
In the first quarter of fiscal 2012, the revenues from the equities trading and fixed-income trading businesses of the major securities groups fell back to a low level, reversing an upturn in the previous quarter. This was because of the diminishing effects of the European Central Bank's long-term refinancing operations, which had led to a rebound in global financial markets in the fourth quarter of fiscal 2011 (Jan. 1 to March 31, 2012). Daiwa posted losses in its investment banking segment because underwriting transactions continued to languish, and we believe it was the same for Nomura. Large-scale public share offerings--including those by Japan Airlines Co. Ltd, All Nippon Airways Co. Ltd., and Japan Tobacco Inc.--are scheduled for the second quarter (July 1 to Sept. 30, 2012) and beyond, which may somewhat boost revenues in fiscal 2012 (ending March 31, 2013). However, we have yet to see conditions improve to the extent of a full-scale recovery in the underwriting business, in our opinion. In the retail segment, the trading values of individual investors dropped significantly amid low stock prices, dragging down stock brokerage commissions and causing weak sales of investment trusts. Japan's securities companies are likely to be required to change their marketing methods and they may have to indicate net yields and commission fees for investment trusts. This is because the current marketing methods for monthly profit distribution-type investment trusts have been acknowledged as a problem. If they are required to display their net yields, it may hurt the sales of these popular investment trusts, and in turn, drag down the overall sales of investment trusts because many of the monthly profit distribution-type investment trusts distribute profits that exceed investment profits through principal drawdowns.
In our opinion, the underwriting businesses of Nomura, Daiwa, and SMBC Nikko Securities Inc. likely suffered, partly because they were involved in insider trading probes conducted by Japan's financial regulator. In a crackdown on insider trading, Japan's financial regulator alleged that staff in Nomura's and Daiwa's investment banking businesses had leaked advance information on a series of share offerings. These cases followed an order in April by the Financial Services Agency (FSA) for Nikko to improve its business administration after the company's internal control systems were found to be deficient with respect to undisclosed corporate information. Nomura and Daiwa have submitted to the regulator preventive measures to avoid recurrences. Meanwhile, the FSA also issued an order to Nomura on Aug. 3, 2012, to improve its operations, requiring the company to implement preventive measures, integrate the measures into its internal control system, and report the progress of its implementation to the regulator. This has affected Nomura's underwriting business--Nomura was dropped as a global coordinator in Japan Airlines' public share offering upon the carrier's relisting on the Tokyo Stock Exchange. However, in our view, the insider trading case is unlikely to pose more difficulties for Nomura's business because the FSA has already given the company a penalty, which was merely an order for it to improve its operations. Meanwhile, the regulator has started discussions on measures to strengthen regulations and penalties for insider trading. Overall, we believe that the negative impact of the insider trading cases on the three companies' medium-term business performance will be manageable for them.
Nomura has announced that it will draw up plans to further reduce costs and review its overseas businesses--including shifting its resources from Europe to Asia--under its new chief executive officer and new chief operating officer. We expect the company to reduce both costs and risk assets, mainly in its European business. Investment banks with global operations have been reducing risk to cope with the structural changes in the global financial markets and stricter regulations, such as the Basel 2.5 capital requirements. As a result, profitability has come under pressure. Nomura's overseas business is likely to mirror this trend, in our opinion. Daiwa, whose overseas business has been the main cause of the losses in its wholesale segment, has announced that it will implement additional measures to manage and control costs in its European and Asian businesses.
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