27 June 2008
Securities sector
Japanese business model now has
the edge
Tatsuo Majima
Research Analyst
(+81) 3 5156-6728
tatsuo.majima@db.com
Reiterating Buy on Nomura, Daiwa
We reiterate our Buy ratings on Nomura Holdings and Daiwa Securities Group.
We think profits are set to recover in FY3/09 assuming no repeat of FY3/08’s
market upheaval, and we also think these companies' assets-under-management
(AUM)-based business models have an edge over the trading-based models of US
investment banks.
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Industry Analysis
Companies featured
Daiwa Securities Group (8601.T),¥1,048 Buy
2008A 2009E 2010E
EPS (¥) 34 63 72
P/E (x) 33.0 16.7 14.5
EV/EBITDA (x) 1.8 6.4 5.8
Nomura Holdings (8604.T),¥1,625 Buy
2008A 2009E 2010E
EPS (¥) -36 96 113
P/E (x) – 16.9 14.4
EV/EBITDA (x) – – –
Matsui Securities (8628.T),¥664 Hold
2008A 2009E 2010E
EPS (¥) 47 42 46
P/E (x) 18.5 15.8 14.3
EV/EBITDA (x) 10.9 8.4 7.4
Monex Beans Holdings (8698.T),¥69,700 Hold
2008A 2009E 2010E
EPS (¥) 3,119 3,166 3,654
P/E (x) 26.2 22.0 19.1
EV/EBITDA (x) 14.3 11.9 10.5
Global Markets Research Company
FY3/08 earnings weak; US business model at a turning point
Brokerages suffered losses in their wholesale businesses in FY3/08 amid the
global stock-market slump and credit-market turmoil. In short, FY3/08 was a year
that highlighted their inability to fully accommodate market volatility. However, the
pain was also limited for the major Japanese brokerages (Nomura Holdings, Daiwa
Securities Group, Nikko Cordial Group) by their avoidance of the trading-heavy
business models of US investment banks. FY3/08's weak performance came
mainly on market factors, and we therefore think earnings could recover if the
market rebounds. US investment banks, on the other hand, need to overhaul their
entire business models in the wake of massive losses and capital infusions, and
we accordingly think any recovery in their earnings momentum is going to take
some time.
No change in expected growth in FY3/09; AUM business still promising
We expect the major brokerages to see a profit recovery in FY3/09. This assumes
no repeat of FY3/08's market upheaval, but the domestic majors' AUM-based
business model looks stable. Excessive expectations for growth in AUM have
come down in the wake of the market slump, but we see scope for RoE of around
10% even assuming a market correction every three or four years. We thus look
for the major Japanese brokerages to close the RoE gap with US investment
banks as the latter scramble to revise their business models.
Valuation and risk
We maintain Buy ratings on Nomura Holdings and Daiwa Securities Group and our
Holds on Monex Beans Holdings and Matsui Securities. In addition to a relative
valuation based on our FY3/09 EPS estimates, our target prices for Nomura and
Daiwa also use a long-term valuation based on DCF assuming a 2.0% risk-free rate,
5% equity risk premium, forecast beta of 1.2 for Nomura and 1.46 for Daiwa, a
7.9% cost of capital, and three years of earnings estimates. Risks include
unexpected market swings and, at the company level, 1) Nomura: exposure to
monoline insurers and price swings for US CMBS (applicable real estate loan claim
collateral securities); 2) Daiwa: fluctuations in profits stemming from the alliance
with Sumitomo Mitsui Financial Group; 3) Monex Beans: sales of proprietary
financial products; 4) Matsui: any upheaval in the market for margin trading, where
it has substantial earnings exposure.

4Q results
Overview
Combined 4Q FY3/08 results for the 26 largest brokerages (including Mizuho Securities) were
as follows: net operating revenue (NOR) ¥151.6bn (-71.7% YoY, -82.9% QoQ), SG&A
expenses ¥588.6bn (-4.7% YoY, -5.7% QoQ), net loss ¥404.7bn, RoE -27.3%. Most of the 26
companies—including majors Nomura and Daiwa Securities—were in a loss for the quarter.
For the full-year FY3/08, combined NOR was ¥2,289.9bn (-27.5% YoY), SG&A expenses
¥2,499.8bn (+11.2%), net loss ¥323.1bn, and RoE -6.8%.
The majors suffered a decline in underwriting fees in 4Q on a weak issuance market and
bond-trading losses on a deteriorating credit market. The second-tier majors meanwhile saw
comparatively favorable profits on bond trading but a sharp drop in brokerage commissions
amid a falloff in retail stock trading. Also contributing to the poor performance was a 4Q
decline in investment trust sales, a key driver through 3Q.
Costs fell 4–5% in 4Q both YoY and QoQ, but this paled against the drop in NOR. With costs
set to expand over the longer term for staff increases and system investment, we think the
brokerages need to push for higher NOR going forward.
The industry does have more stable profit streams than it used to, and a higher weighting of
variable costs, but it remains unable to turn a profit in a down market.

2. Recommendations: Major
Brokers
Earnings: Sluggish due to poor markets. No change in business
model.
The major securities houses reported sluggish earnings or losses for 4Q FY3/08 amidst a
slump in the stock markets and wild movements in the securities and forex markets that
made it impossible to secure trading profits. Wholesale divisions were hurt by a falloff in
IPOs as well as a preference for CBs over equity issues for public offerings. The retail
business suffered from dwindling stock consignment trades, while investment trusts, which
had remained robust to now, saw a marked slowdown in growth in the wake of the global
equity downturn.
Nomura Holdings reports that net operating income plunged 91.2% QoQ and 93.1% YoY to
¥21.5bn in 4Q FY3/08. It posted a net loss of ¥153.9bn. The weak performance was due to
the posting of ¥132bn in reserves for its exposure to downgraded monoline insurers and
¥22bn in appraisal losses on U.S. CMBS. Other factors included poor results in Global Market
bond trading, Global Investment Banking underwriting fees and equity consignment fees in
its domestic division.
Daiwa Securities Group’s net operating income tumbled 42.0% QoQ and 50.9% YoY to
¥70.4bn in 4Q, with a net loss of ¥12.9bn. The wholesale division fell deeply into the red on a
deterioration in bond trading earnings, though retail earnings held up well with relatively little
decline. Asset management also enjoyed fairly stable growth, so while the business did
experience a loss, the results were not particularly disappointing.
Nikko Cordial Group does not announce consolidated earnings, but net operating income at
Nikko Cordial Securities, Nikko Citigroup and Nikko Asset Management together dropped
11.0% QoQ and 21.6% YoY. They had a combined net loss of ¥2.9bn. Wholesaling came out
of the red with a ¥10m net profit, but retailing posted a loss due to a drop in investment trust
subscription fees. Asset management earnings also worsened.
Shinko Securities had net consolidated operating income of ¥21.6bn, down 30.4% QoQ and
45.1% YoY, and a net loss of ¥6.3bn. Earnings slowed sharply in 4Q, with a slide in both
stock and bond trading and a comparatively large falloff in equity consignment trading fees.
Group subsidiaries made little meaningful contribution. Its upcoming merger partner Mizuho
Securities posted an appraisal loss on its securitized products and realized a net loss of
¥221.9bn.
Wholesale segment: Nomura Holdings’ Global Markets and Global Investment Banking
divisions posted a combined net operating of ¥118.5bn and pre-tax loss of ¥208.7bn. This
was attributable primarily to the posting of ¥132bn in reserves on the company’s exposure to
monoline insurers and ¥22bn in appraisal losses on its U.S. CMBS. Stock trading losses also
suffered with the drop in the equity markets, and equity-related underwriting fees were down
as well.
Daiwa Securities SMBC (parent) saw net operating income in its wholesale division plummet
94.4% QoQ and 95.6% YoY to ¥2.3bn and had a recurring loss of ¥30.5bn. It posted a loss in
its stock and bond trading and a drop in equity consignment fees. Bond trading in particular

ended with an appraisal loss due to the distorted movement in domestic bond markets in
March.
At Nikko Citigroup, net operating income was up 34.1% QoQ and up 3.0% YoY to ¥26.7bn,
with a recurring profit of ¥3.3bn. It was the only wholesale securities house to report a profit
thanks to ¥11.7bn in stock and bond trading profits and a reduction in administrative costs.
Mizuho Securities disclosed a net operating loss of ¥181bn and recurring loss of ¥213bn in its
wholesale segment. Foreign-denominated securitized products had a market value of ¥100bn,
around 22% of the book value.
Retail segment: Daiwa Securities was stable with a relatively mild slowdown. At Nomura
Holdings, net operating income in the domestic division skidded 20.2% QoQ and 36.7% YoY
to ¥78.5bn, while pre-tax profits dropped 61.6% QoQ and 74.4% YoY to ¥11.1bn. In addition
to a sharp drop in subscription fees for investment trusts, the segment was plagued by a
decrease in stock consignment fees and sales commissions on foreign bonds.
Daiwa Securities’ net operating income fell 19.6% QoQ and 27.1% YoY to ¥45.6bn, while
recurring profits were down 29.3% QoQ and 42.0% YoY to ¥12.6bn. Investment trust
subscription fees and stock consignment fees slid 46.4% and 24.1% QoQ. Foreign bond
sales were relatively solid.
Nikko Cordial Securities saw net operating income in its wholesale division slump 27.8%
QoQ and 34.6% YoY to ¥39.7bn, and recurring profit dove 89.0% QoQ and 91.6% YoY to
¥1.5bn. The main culprit was a downturn in investment trust subscription fees and stock
consignment fees.
Shinko Securities (parent) posted a 28.8% QoQ and 46.0% YoY drop in net operating income
to ¥20.3bn and a recurring loss of ¥5.4bn. Foreign bond sales were down precipitously, and
there were declines in bond trading earnings, investment trust subscription fees and stock
consignment fees.
Asset management segment: This division remained firm as a whole. Nomura, while the top
in profitability, endured a notable slowdown in 4Q. In contrast, Daiwa Asset Management
had somewhat lower profitability but enjoyed steady earnings for the quarter. Net operating
income in Nomura’s asset management division was down 25.4% QoQ and 28.2% YoY to
¥17.3bn in 4Q, while pre-tax profits fell 70.9% and 68.8% to ¥2.5bn. Profits were also
affected by appraisal losses in managed funds.
Daiwa Asset Management’s operating income was down 8.5% QoQ but up 9.9% YoY to
¥19.7bn. Recurring profits slipped 16.7% QoQ and 4.3% YoY to ¥3.6bn. It appears to have
maintained fairly stable growth and favorable momentum.
Nikko Asset Management’s operating profits were down 9.8% QoQ and 15.0% YoY to
¥19.3bn, and recurring profits were down 37.9% QoQ and 66.3% YoY to ¥2.0bn. The drop
stemmed mainly from a decline in consignment commissions on equity investment trusts.
In FY3/08, the wholesale business stagnated amidst the falling stock markets and stable
credit markets, but the retail sales and asset management segments held up reasonably well.
The results confirmed the stability of the deposited asset business.