EUR 850.00 For Business Accounts Only

Morningstar | Softbank IPO Fees Not Enough to Save Daiwa's 3Q From Harsh Market Environment at Year-End. See Updated Analyst Note from 29 Jan 2019

Daiwa Securities reported its weakest quarter since the start of Abenomics in 2013, reporting annualized return on equity of just 4.5% for the October-December period. Pretax profit was down quarter on quarter in three out of four segments, with retail down owing to slower sales of structured bonds and investment trusts despite an increase in underwriting fees from the Softbank initial public offering, wholesale down owing to reduced customer flows amid the market volatility, and asset management down slightly reflecting the drop in the market value of assets under management, although Daiwa continued to benefit from net inflows of customer assets (JPY 393 billion during the quarter, slightly above the recent average of around JPY 250 billion per quarter). Only investment, Daiwa's private equity segment, improved quarter on quarter from a loss in the prior period. Although market conditions were harsh at the end of 2018, the environment has stabilized somewhat so far in 2019 and we expect a sequentially better January-March period, the final quarter of Daiwa's fiscal 2018.

With a lighter cost structure overseas, Daiwa tends to report higher ROEs than its larger rival Nomura, averaging 10% in the past six years since the start of Abenomics. We project an average ROE of 7.5% over the next five years assuming conditions similar to those at present but not as volatile as experienced in the final weeks of 2018. We reduce our fair value estimate to JPY 768 per share from JPY 786 to reflect the time value of money and modestly lower assumptions for equity and bond trading values. We continue to think Daiwa will be a better investment than Nomura unless Nomura decides to cut its overseas cost base more radically than it has done so far.