Morningstar | Lackluster Quarter for Daiwa as Currency Turmoil Turns off Investors From Emerging-Markets Bonds
Daiwa Securities Group reported lackluster results for the July-September quarter, reflecting reduced sales of overseas bonds to retail investors amid volatile emerging-markets currencies, lower revenue from equity and debt underwriting, and a JPY 2.2 billion loss in private equity due to revaluation of an existing investment. On the positive side, asset-management profits were stable as usual and Daiwa was able to benefit from increased volatility in the Japanese government bond market when the Bank of Japan adjusted its policy stance in July. Annualized ROE for the quarter was 5.5%, similar to the previous quarter's 5.8% and below the average of 11.3% over the past five fiscal years since the start of Abenomics.Daiwa's overseas operations were profitable for the tenth consecutive quarter, contributing 6% of its ordinary profit. Despite the insipid results this quarter, we continue to think that Daiwa is likely to earn better returns over the cycle than its larger rival Nomura, which has much larger overseas operations that more frequently detract from its overall profit. Nomura reports its results on Wednesday, Oct. 31.
As a positive bit of trivia, Daiwa's book value per share finally topped the bubble-era record posted in March 1991, as the firm has gradually accumulated retained earnings to compensate for its large losses in the early 1990s.
We maintain our no-moat rating and fair value estimate of JPY 786 for Daiwa (21% above today's closing price). Our fair value estimate is 0.98 times book value per share of JPY 801.84Â as of Sept. 30. Looking past this lackluster quarter, we continue to project an average ROE of 8.3% over the next five years, down somewhat from the recent average of 11.3% given that we do not expect the operating environment for the firm to be as strong on average as it was at the beginning of Abenomics. We put fair value slightly below 1.0 times book because 8.3% is slightly below our assumed cost of equity for Daiwa of 8.5%.
Daiwa Securities Group is a financial holding company engaged in the securities-related business and other investment and financial services. Retail segment provides securities brokerage services to individuals and unlisted-corporate customers. Wholesale segment offers stock, bonds, foreign exchange and the other derivatives mainly to institutional investors and business investors. It also provides investment banking services. Asset Management segment provides investment advisory and asset management services for institutional investors and overseas asset management companies. Investment segment is engaged in the private equity investment activities.
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