Daiwa Lauds Ability to Stay Profitable as Nomura Loses Money

(Bloomberg) -- The top executive at Daiwa Securities Group Inc. is urging investors to focus on the firm’s profitability after difficult industry conditions pushed larger rival Nomura Holdings Inc. into losses.

Shares of Japan’s second-largest brokerage are “quite undervalued,” CEO Seiji Nakata said in a recent interview, citing the company’s dividend payout policy, stock buybacks and ability to still make money. In a bid to bolster those profits, Daiwa on Tuesday announced plans to cut 15 billion yen ($136 million) in costs over two years, joining Nomura in trying to combat a slump at the retail brokerage business.

Both firms have seen their shares fall more than 10% this year as individual clients remain reluctant to trade, reducing revenue from their mainstay consumer operations. Nomura’s woes run deeper because it has been losing money abroad, prompting it to pledge $1 billion in cost reductions at its global trading and investment banking business.

Most of Daiwa’s cost cuts will focus on the domestic retail business, where it plans to save 10 billion yen by the year ending March 2021. About 4 billion yen will be trimmed from the wholesale business and the remaining 1 billion yen from other areas. The Tokyo-based company will merge branches in coming years and build more satellite offices that are operated by fewer employees.

While Daiwa’s net income fell 42% in the year ended March, Nakata framed the result as a positive, at least compared to Nomura. The larger firm’s first annual loss in a decade may help to explain the drop in sentiment toward Japanese securities companies, he said.

“Nomura, the No. 1 player in our industry, has fallen into losses -- this is a quite shocking story,’’ he said. “Question marks are now hanging over the revenue prospects of the whole brokerage sector.’’

Shares of Daiwa rose 0.7% on Wednesday morning in Tokyo, paring this year’s decline to 13%. The stock, which reached a six-year low last week, is trading at about 0.6 times the book value of its assets, higher than Nomura’s 0.45.

Daiwa also plans to raise revenue by 15 billion yen over the next two years by reallocating resources into more strategic areas, it said in its presentation Tuesday. The firm is creating a unit focusing on mobile retail services to win younger clients, and is working with Japan Post Bank Co. to sell investment products.

Daiwa has a much smaller overseas presence than Nomura, which has struggled to sustain profits outside of Japan since it bought bankrupt Lehman Brothers Holdings Inc. operations in 2008.

Nakata brushed aside the recent drop in Japanese equities, saying the Nikkei 225 Stock Average could rebound from around 21,300 now to 24,000 by the end of the year.

“The market will probably stabilize once people realize that the world economy has the power to keep growing at about 3%,’’ he said.

To contact the reporters on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net;Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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